US embassy cable - 05KUWAIT1879

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001879 
 
SIPDIS 
 
E.O. 12958: DECL: 05/05/2015 
TAGS: ECON, EFIN, EINV, PINR, KU, Investment Sector 
SUBJECT: KUWAIT INVESTMENT AUTHORITY: DOING FINE BUT 
WATCHING U.S. MARKET EXPOSURE CLOSELY 
 
Classified By: Ambassador Richard LeBaron for reason 1.4 (d) 
 
1.  (C) Summary: During a May 3 meeting with the Ambassador, 
Kuwait Investment Authority Managing Director Bader Al-Sa'ad 
said that KIA's assets had grown "substantially" over the 
previous year, but noted that recently KIA's U.S. investments 
had been a "drag on overall performance."  He also said that 
KIA was selling real estate holdings in the U.S. because of 
"high taxes on capital gains and income."  He said that the 
annual contributions to the Kuwait Future Generations Fund, 
which is managed by KIA, is not as large as is commonly 
thought because of the recent massive increase in GOK 
expenditures.  Comment: The KIA is thought to manage amounts 
between between $75 and $100 billion on behalf of the GOK but 
maintains a very modest outward appearance, both physically 
and in the amount of information it makes available to the 
markets and its own citizens.  End Summary and Comment. 
 
KIA: History and Background 
--------------------------- 
 
2.  (C)  Ambassador met with Kuwait Investment Authority 
(KIA) Managing Director Bader Al-Sa'ad and Head of the 
Americas Investment Department Ahmad Bastaki on May 3 in 
order to learn more about KIA's investments in the U.S. and 
elsewhere.  KIA was founded in 1982 and is charged with 
managing the investments of the GOK.  The source of these 
investments come from two major areas: the Future Generations 
Fund (FGF), which is a 10% set-aside from government revenues 
each year, and all other surpluses in the general reserves. 
The two categories are managed separately and the funds are 
not co-mingled.  KIA does not publicly disclose its total 
assets, but it is thought to control between $75 and $100 
billion.  It allocates these assets into investments in OECD 
countries, based roughly on each country's percent of total 
world GDP, according to Al-Sa'ad.  The U.S. and some European 
countries have received a larger share of investments than 
their GDP indicates, he added. 
 
3.  (U) KIA is overseen by a Board consisting of the Finance 
Minister as Chairman, the Minister of Energy, the Central 
Bank Governor, a Ministry of Finance Undersecretary, and five 
other Kuwaiti nationals with backgrounds in investment and 
finance.  The Board appoints a Managing Director to oversee 
the day-to-day operations.  KIA has over 300 employees in 
Kuwait and also operates an office in London.  The London 
operation, known as the Kuwait Investment Office, actually 
predates KIA's charter, having been established in 1953. 
According to Al-Sa'ad, the KIO is considered by the 
Government of the UK to be similar to a "financial attach" 
and is accorded "special treatment" by the City of London. 
Additional background on the KIA can be found at: 
http://www.kia.gov.kw. 
 
A "Good Year", But Concerns Over U.S. Economy 
--------------------------------------------- 
 
4.  (C) Al-Sa'ad said that the past year had been good for 
KIA, and that its assets grew "substantially."  He expressed 
concern over the performance of assets in OECD markets, in 
which he said the KIA was "heavily exposed."  He said that 
the KIA "does not really hedge against downturning markets," 
and added that the "U.S. is really dragging" on the 
performance of KIA's assets.  KIA's investments in the U.S. 
are mostly in equity funds managed through medium-sized 
investment firms, Al-Sa'ad explained, adding that KIA uses a 
variety of third party fund managers to manage its assets. 
KIA used to own a good deal of property in the U.S., Al-Sa'ad 
said, but was having to sell these holdings because of what 
he described as "high taxes on capital gains, income and 
dividends."  He attributed these tax difficulties to the 
absence of a Double Taxation Treaty between the U.S. and 
Kuwait.  KIA has a wholly owned subsidiary in the U.S., 
"Breadstreet Inc.", that manages its remaining property 
holdings, Al-Sa'ad said, and still invests in real estate 
through real estate investment trusts (REITs) and other 
mechanisms.  He said that the KIA was still actively looking 
for ways that the GOK could continue to own property in the 
U.S. 
 
5.  (C) Al-Sa'ad noted that the contributions from the budget 
into the Future Generations Fund (FGF) were not as large in 
the past year as some thought because of the rapidly 
expanding GOK budget.  With all of the big projects that the 
GOK is planning, he explained, there was less surplus revenue 
to be given to KIA.  The "mega-projects" he mentioned 
included the planned causeway across Kuwait Bay, the Bubiyan 
Port, Failaka Island, railway projects and more.  He also 
said that the GOK was increasing its expenditures on 
infrastructure maintenance and that this was also using up 
funds that would otherwise go to the KIA. 
 
Keeping A Low Profile, but Answering to Parliament 
--------------------------------------------- ----- 
 
6.  (C) When the Ambassador noted the modesty of Al-Sa'ad's 
office compared to the lavish offices of other top financial 
executives in Kuwait and especially relative to the amount of 
money that KIA handles, Al-Sa'ad responded that KIA is still 
a government body and still needs to answer to the National 
Assembly on its own internal budget.  (He pointed out that he 
has been waiting for a new carpet for his office for over a 
year.  It needs it.)  He explained that the KIA is regulated 
by the State Audit Bureau and has to report annually to the 
National Assembly, which reviews its internal budget and the 
performance of the assets under its management.  Any MP is 
entitled to look at KIA's budget, he said, and is entitled to 
know the total amount of assets under KIA management.  This 
review usually takes place in June or July, he explained, and 
the Kuwaiti newspapers usually publish general points and a 
rough estimate of KIA's assets at that time.  Al-Sa'ad would 
not disclose the amount of KIA assets, but did say that the 
newspaper discussions of the budget hearings would give a 
rough idea. 
 
Not Investing in the GCC, Some Investments in Kuwait 
--------------------------------------------- ------- 
 
7.  (C)  When asked about regional investments, Al-Sa'ad said 
that the KIA was not heavily invested in GCC countries, and 
only had a few small holdings and interests in things 
"purchased years ago."  While noting that the current 
economic growth throughout the GCC is "a good boom," he said 
that it was really all the same area and economic climate as 
Kuwait and that the KIA did not see the need to invest in the 
whole GCC if it could make some investments in Kuwait.  It 
would be a duplicate investment, he explained, and would also 
duplicate the risk and KIA's exposure in the region.  The GCC 
doesn't need capital, he added, and said that the KIA "does 
not want to compete with private sector investment."  The KIA 
has some investments in Kuwait, Al-Sa'ad said, including a 
20% stake in Bubiyan Bank, a newly formed Islamic bank.  He 
said the KIA prefers to let the private sector make these 
types of investments in Kuwait, but that the bank investment 
was a unique situation.  The Central Bank had received almost 
20 separate applications from Kuwaiti banks and financial 
institutions to open an Islamic bank, he explained, so 
instead of having to choose amongst them, the Central Bank 
asked KIA to provide some capital to start a new bank and 
then allowed the public to buy a stake.  He said the KIA will 
eventually sell its stake. 
 
Funds Flows Back to Kuwait 
-------------------------- 
 
8.  (C) When asked his opinion about flows of private 
capital, Al-Sa'ad said that it appeared that money was coming 
back to Kuwait from being invested abroad, but he added that 
he could not be sure of the mix of incoming funds.  He said 
that the most obvious sign that money was coming back to 
Kuwait from abroad was the continued rise of the stock market 
and real estate prices, despite the fact that the Central 
Bank has consistently raised the interest rates and capped 
bank lending over the past year. 
 
Not Ready to Invest in Iraq 
--------------------------- 
 
9.  (C) The Ambassador encouraged Al-Sa'ad to direct KIA 
assets towards Iraq to help spur economic growth.  Al-Sa'ad 
agreed that there would be strong opportunities for 
investment in Iraq in the future.  In the present, however, 
Al-Sa'ad said that it was still too risky for KIA to make 
investments there and that there were many questions to be 
answered, including when the market there would be opened up, 
how it would look and when Iraq would really join the 
international economic community.  He said that he thought 
that Iraq could be an "anchor for the region" in terms of 
economic growth and development.  Comparing the GOK's method 
of investing its oil surplus through the KIA with any future 
oil surplus investment system in Iraq, Al-Sa'ad said that 
there would be many more opportunities for viable internal 
investments in Iraq than there were in Kuwait and that future 
governing bodies in Iraq would not need to look abroad as 
much as the GOK does for investment opportunities.  He did, 
however, agree that the method Kuwait uses for managing its 
oil revenues may have some relevance for Iraq as it wrestles 
with this difficult issue. 
 
Bio Note 
-------- 
 
10.  (C) Bader M. Al-Sa'ad was appointed as Managing Director 
of the Kuwait Investment Authority in December, 2003.  He has 
worked in the investment and financial sector for 24 years 
and is a graduate of Kuwait University with a major in 
Accounting.  He speaks good English. 
 
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Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
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LEBARON